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Thermal coal prices close to rock bottom: Citi analysts

Perth — Thermal coal prices are close to rock bottom as coal producers have squeezed almost all of the gains from increased productivity, lower fuel prices and weaker currencies, and prices are set to stabilize in 2016, said commodity analysts at investment bank Citi in a client conference call Monday.

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In a wide-ranging discussion on a range of commodities led by Citi head of commodities research for Asia, Jason Tudor, the bank's stated position on the outlook for thermal coal over the next three to six month period is bearish.

For Newcastle 6,000 kcal/kg NAR thermal coal, Citi's analysts are forecasting an average price of $56/mt FOB for the immediate October-December period, and recovering slightly to $60/mt for the 2016 year.

"While [mine production] costs are expected to continue to fall, this process is likely to slow as the biggest gains from productivity, oil and foreign exchange have already been achieved," said the analysts in an accompanying presentation in a section on thermal coal.


"Moreover, we are already seeing curtailments, even from top producers such as Glencore and Peabody," it said.

Australian thermal coal miners' costs including China's imports tariff have come down to $58/mt presently from $73/mt a year ago; and Indonesian miners' costs are now down to $41/mt from $60/mt last September, said the presentation.

The largest change in costs has occurred in Russian production which is now down to $51/mt compared with $92/mt in September 2014.

CHINA, INDIA IMPORTS

China's imports of thermal coal are pegged by Citi at 95.3 million mt in the 2016 year and down from 115 million mt forecast for this year, said the bank in its presentation.

"Imports have declined sharply due to quality restrictions and unpredictable enforcement on imports, as well as weak industrial activity and growing non-coal generating capacity," said Citi's presentation referring to China.

The bank is expecting some improvement to China's Q4 import volumes based on seasonal factors, but noted that any upside to prices was limited because a weaker renminbi currency has boosted the attractiveness of domestic thermal coal.

Restarts to Japan's nuclear power generating units following the Sendai-1 unit in August, are expected to displace costlier fuel oil plants, then LNG rather than coal-fired generators, said Citi.

India's thermal coal imports are set to rise to 194.6 million next year from 173.8 million mt this year, said the presentation.

High coal inventories, strong domestic coal production and weaker electricity demand are designated as headwinds for import demand, said the bank.

On the supply side, Australian export shipments of thermal coal are expected to be 214 million mt in the 2016 year, up from 204 million mt in 2015, and for Indonesia exports are to touch 274.6 million mt next year retracing slightly from 283 million mt in the 2015 year, said the bank.

"Tightening quality requirements in China and demand for higher grade coal in Indian utilities will continue to pressure [Indonesian] exports," the Citi analysts said in their presentation.

Russian thermal coal shipments are forecast to hit 145.6 million mt next year, compared with 138.7 million mt in the 2015 year.

A depreciation in the ruble has increased Russian coal exporters' competitiveness, and Russian coal producers are "increasingly muscling into both the Atlantic and Pacific [markets]," said Citi.

Concerns over slower Chinese growth came to a head in the July-September quarter with China's unexpected currency depreciation and turmoil in its equity markets, said the Citi analysts' presentation.

"Citi's chief economist estimates at 55% chance of a China-led global recession in the next year," said the bank in its presentation.

It went on to state: "In this scenario, global growth would fall to around 2% before recovering in 2017-2018."

In contrast to 2009, when China's policymakers quickly delivered a massive filip to its economy, the bank's analysts are ruling out similar action at this stage.

"Policy has turned more supportive, but there is no appetite for large scale stimulus," said the presentation.

LNG, a competitor fuel to thermal coal in power generation, is also in the doldrums.

"We are entering in to a global LNG glut come 2016 as US and Australian gas meets tepid Asian demand. Europe is expected to be the sinkhole for excess cargoes," said the Citi presentation.

--Mike Cooper, michael.cooper@platts.com
--Edited by James Leech, james.leech@platts.com